More Nortel Balance Sheet Shenanigans

When you asked yourself the question, “how did Nortel wind up bankrupt?” all you need to do is consider the accounting dishonesty creativity of their balance sheet.

According to my morning Globe and Mail, Nortel (NRTLQ.PK) is valuing certain CDMA and LTE patents at $149 million, rather than the US$1.13 billion that Ericsson (ERIC) has promised to pay for a non-exclusive perpetual licence. If the Globe’s sources are in-the-know, this means that the Nortel sale doesn’t meet the federal government’s minimum deal review threshold of $312 million.

A critical question has been whether the value of the deal exceeded the $312-million (Canadian) threshold for a full-scale Investment Canada review. Nortel and Ericsson argue that the book value of the assets are only $149-million, and therefore it is not reviewable.

The government amended the Act this spring to change the threshold standard from “book value” to “enterprise value.”

“Enterprise value” includes intellectual property and employees. But the regulations reflecting the amendments are not yet in force.

Ottawa had been vague on what standard it would apply, but a senior official said yesterday that, in the absence of new regulations, the government would use the old rules.

“With the current transaction, we’ve confirmed it will be book value” that serves as the threshold, a senior government official said yesterday.

$149 million? Who came up with that number? One scenario sounds as though officials might be considering the value of all of Nortel’s assets against all of its liabilities, but as we know, Nortel’s June balance sheet shows a negative US$4 billion of shareholder equity. So that can’t be the analysis.

Could it be that the CDMA and LTE assets are being valued at $149 million on Nortel’s current balance sheet? Quite possibly, but that’s a red herring now that the market has indicated their true value is at least US$1.13 billion.

Naturally, one can only assume that the accounting difference between $149 million and US$1.13 billion will now reside in goodwill or intangibles, or at least it should as of the date of the balance sheet that is published immediately following the Court-supervised auction. Or when the Feds ask for a new “interim” balance sheet (hint, hint).

It’s not like that difference is in thin air, and whether the difference is ascribed to the specific assets or sitting in the intangibles, it most definitely IS on the balance sheet somewhere. Or at least will be very shortly. Enterprise Value, by definition, includes debt; but the idea that book value excludes the impact of goodwill and intangibles is preposterous.

Accounting aside, it is intellectually dishonest to pretend that the patents are still worth $149 million, now that the auditors and federal officials know that someone will pay US$1.13 billion for them.

Auditors aren’t fond of CFOs mis-stating the values of assets, up or down.

If the public servants advising Industry Minister Tony Clement want to encourage approval of the Ericsson LTE transaction, they are going to have to find a better cover story than this one.

Comments

[debtfree:]

The question that comes up is what is Ericsson buying the Patent Portfolio or the entire set of assets, which is a lot more than Patents, namely the customers who buy CDMA equipment.

Aug 20 07:09 PM

[teraflop:]

Assets not marked-to-market typically re-valued on transactions. However, Goodwill is an example where you could apply an impairment process to revalue it. Until someone ponies up any value other than $149MM, it remains thus.

Aug 20 08:07 PM

[Linda09:]

I feel that what you are saying does not make sense. The courts have been involved in both the United States and Canada. Some how it doesn't make sense that people are putting the blame on Nortel. What do the courts say the value is? Is there access to what they are saying? I have not heard anyone mention that .
Linda
Wife of a Nortel Employee for 35 yrs.

Aug 21 11:11 AM

[Dan Leonida:]

You tell a court $149 mln. and the judge has no choice but to believe you unless he/she has a good reason not to, or somebody contradicts you. The past creative accounting that NT is known for, did not unfold in BK court and, therefore, the judge is not allowed to take it into consideration. IMHO, anyways! If anyone knows better, please contribute!

danleonida


On Aug 21 11:11 AM User 474802 wrote:

> I feel that what you are saying does not make sense. The courts have
> been involved in both the United States and Canada. Some how it doesn't
> make sense that people are putting the blame on Nortel. What do the
> courts say the value is? Is there access to what they are saying?
> I have not heard anyone mention that .
> Linda
> Wife of a Nortel Employee for 35 yrs.

Aug 21 12:48 PM

[JDignum:]

Great article. It's about time someone detailed this so clearly. There is so much "b.s." around the whole issue of Nortel liquidation/bankruptcy, whatever it's considered right now, that's it's nice to have a clear examination of the facts.
Now it is also time to get the real message out to the public about why Nortel employees will soon lose LTD payments, health insurance, pension contributions, life "insurance", and value in their pension plan due to Nortel's bankruptcy and the abandonment by the government of private-sector employees suffering under a company bankruptcy.

Aug 23 01:19 PM

[JDignum:]

And I have to add those recently laid off who were denied severance.
All these employees are facing losses of certain plans that were set up as ASOs. These are uninsured and often underfunded, and totally legal . About 1,000,000 Canadians are on this type of benefit plan, so check your benefit plans, Canadian employees and taxpayers. Because the ASOs are uninsured, you can lose them under company bankruptcy. Also, due to the rule that "The Bankruptcy Act Supersedes the Employee Protection Act", in combination with the ASO benefit plan, you lose your payments once the "Trust" holding them runs out of funds, and then get thrown into a creditor pool with a bunch of other big creditors in order to try to reclaim your losses. You won't get much in this pool.
So much for the employee contract and the Social Contract. The U.K. and the U.S. have a pension protection fund, and the U.K. styles their LTD plans as pensions. The Canadian government does neither. Nice, huh. Hello poverty for many Nortel pensioners and LTDers.

Aug 23 01:33 PM

[1moreLTDer:]

Come on people! Surely you've heard of the term Fair Market Value? What the market will bear... If Ericsson is willing to fork over 1.13B it's not because they're feeling charitable. It's because the understand the real value of what they're buying...

Aug 23 04:08 PM